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Foreclosure Mess Draws in the Lawyers Who Handled Them

With the rash of foreclosures across the country in recent years, many lawyers have specialized in the lucrative business of handling cases for banks and loan servicers. And now that flaws are being acknowledged by big lenders in the processing of foreclosures, some of these lawyers are finding themselves in the cross hairs of investigators — and scorned by their former clients.

Consider the case of David J. Stern, a lawyer in Plantation, Fla., whose firm handled an estimated 20 percent of foreclosure-related proceedings in Florida, one of the states hit hardest by the housing crisis.

Mr. Stern is under investigation by the Florida attorney general and is a defendant in several lawsuits brought by homeowners. And in recent days, lenders and mortgage holding companies that had used Mr. Stern’s services, including Citigroup and GMAC Mortgage, said they would no longer do so.

Mr. Stern has not been charged with any wrongdoing and a lawyer representing him, Jeffrey Tew, said that he had done nothing wrong. But a former employee recently testified that Mr. Stern’s firm, in a rush to file and complete thousands of foreclosures, routinely violated procedures by having foreclosure-related documents notarized that were never checked for accuracy — all with the lawyer’s knowledge.

“Everything was about getting the judgment entered because we had to report back to the banks,” the former employee, Tammie Lou Kapusta, testified in a deposition last month given to the Florida attorney general, Bill McCollum.

Along with Mr. Stern, other lawyers affiliated with so-called foreclosure mills — the processing centers run by law firms — are coming under scrutiny. In addition, recent lawsuits filed in Mississippi and Kentucky have charged that lawyers handling foreclosures entered into illegal fee-splitting arrangements with two publicly traded companies involved in mortgage-related services, Lender Processing Services and Prommis Solutions. Officials of both companies deny the accusations.

In a lawsuit filed in Federal District Court in Manhattan, a major foreclosure lawyer in New York, Steven J. Baum, was recently accused by a homeowner of filing fictitious and false documents in foreclosure-related proceedings. Mr. Baum, whose firm is located in Amherst, a suburb of Buffalo, has come under repeated criticism by state judges for his practices.

Mr. Baum did not respond to a telephone call seeking comment. A spokesman, Earl V. Wells III, stated in an e-mail that Mr. Baum’s firm followed “the rules and regulations regarding the various processes involved in a foreclosure proceeding” and that it took “the utmost care” to do so.

Lawyers who knowingly file fraudulent documents or fail to properly oversee subordinates involved in the preparation of such records can face criminal charges or professional sanctions ranging from disbarment to suspension, said Raymond H. Brescia, a professor at Albany Law School in New York State.

Photo

Lawyers sorting through foreclosure files in Broward County, Fla. One law firm handled 20 percent of the filings in the state.Credit
John Van Beekum for The New York Times

The current furor over the submission of fraudulent or improperly signed foreclosure-related filings was ignited in September when GMAC Mortgage, now a part of Ally Financial, acknowledged that it had submitted inaccurate documents. The nationwide investigation announced this week by the country’s 50 attorneys general is expected to focus in part on the role of lawyers in the submission of allegedly fraudulent mortgage records signed by robo-signers.

But there have been other instances in recent years in which lawyers have been accused of submitting false, inaccurate or incomplete documents in foreclosure-related proceedings so as to churn through cases and collect fees.

Kathleen C. Engel, a professor at Suffolk University Law School in Boston, says she believes that banks have been long aware of such questionable legal practices but choose not to challenge them for fear of slowing the pace of foreclosures.

Years ago, lawyers once handled and verified most of the paperwork involved in a foreclosure. But the advent of mortgage securitization a decade ago, financial experts say, gave rise to a parallel legal industry. In it, a law firm is paid a flat fee by loan servicers to handle a foreclosure, which is lucrative for lawyers who process a high volume of cases.

“This is a very profitable business model,” said O. Max Gardner III, a lawyer in Shelby, N.C., who defends homeowners in foreclosure proceedings. “You’ve got five lawyers and four hundred people without legal training working for them.”

In an interview last month, Mr. Stern, the Florida lawyer, accused Mr. McCollum, who is standing for re-election as attorney general, of political motives in opening the inquiry into his firm and others.

“I can’t speak for the other firms but I can assure you that there has not been submission of fraudulent documents,” Mr. Stern said.

According to the lawsuits filed this month against Lender Processing Services and Prommis Solutions, plaintiffs’ lawyers accused the companies of using various mechanisms to steer legal work to foreclosure mills, then splitting legal fees with the lawyers running those operations.

In many states, it is illegal or unethical for lawyers to split fees with nonlawyers. Both Lender Processing and Prommis essentially act as informational middlemen between mortgage servicers and law firms doing foreclosure work. Both have denied being involved in such practices.

A version of this article appears in print on October 16, 2010, on Page B1 of the New York edition with the headline: A Foreclosure Mess Draws In the Filing Lawyers, Too. Order Reprints|Today's Paper|Subscribe